• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Explain the meaning of the term 'inflation'.

Extracts from this document...

Introduction

UNIVERSITY OF SALFORD Name: SZE WAH, LEUNG Student Number: @00081259 Course: International Foundation Year Subject: International Foundation Year Macroeconomics Question: 2 Question 2a) Explain the meaning of the term 'inflation'. Along with the development of society more and more problems are brought to our attention, one of which is that 'inflation'. Nevertheless, with the advance of the human civilization, the living standard increases gradually so the price index and Retail Price Index (RPI) rise gradually as well. Deep down, 'inflation' means a persistent increase in all money prices over a period of time which is generally considered to bring costs to society is the form of material, political and psychological costs. Also, the increase must be sustained at some rate before there is inflation and when the price level increases steadily over time. 'Inflation' that is to say, it is decrease in the purchasing power and all money prices to the same extent. In economic, inflation is measured as a percentage change in the PRI over a given period of time, for example, if the RPI increases from 100 to 200 in a year, then inflation is said to have increased by 20% that year. In the UK, the Retail Prices Index is most commonly used measure of inflation. Because RPI is measure the cost of living index, it can reflex the money price level such as through the changes in the prices of goods in the shops by households. ...read more.

Middle

It exist is due to excess demand. It means that the resources are not completely sufficient the different regions and sectors of the economy. Demand inflation means the higher aggregate level of activity, the large proportion of areas and industries which experience excess demand for goods and labors of various sorts. Generally, we can know that increase in aggregate demand will cause higher prices and it bring to the society of cost inflation as well. However, cost-push inflation is reverse of demand-pull inflation. Cost inflation is due to increase the factor input cost such as imported goods and raw materials so that cause to raise the prices or wage rates round the economy. Basically, the costs increase would cause the manufacturer to raise prices, soon afterwards, increases in prices cause workers to demand higher wages as well. So the cumulative effect of all these processes cause of passed on in higher prices to consumers and the cost-push inflation is extremely difficult to stop finally. Question 2c) Suggest how a government might tackle inflation. In economics, there are four ways of dealing with inflation. Fist, government can adopt tough incomes policies to keep inflation under control. Second, government can through institutional and constitutional reform to tackle inflation like as fiscal and monetary policies. Third, government can adopt indexing deal with inflation as well. ...read more.

Conclusion

From figure 2c, which express the price level decrease from P1 to P2 due to the Central Bank increase in interest rates, there is evidence that once increase in interest rates would cause to decrease the aggregate demand as well. To put it more simply, there is also indication that rise in interest rates may exert a downward pressure on prices. Figure 2c: A rise in the rate of interest effect. Third, the government can adopt indexing to tackle inflation. Whereas indexation might automatically adjusts nominal contracts for the effects of inflation, any unanticipated inflation and inflation effect can be tackled. For instance, wage rates, pensions, interest payments on bonds, income taxes and many other things can be indexed in this way. Indeed, the purpose of indexing is to reduce the social cost of inflation. However, everything has a good side and a bad side, and indexing is no exception. Some economists worry about that people would diminish the confidence combating inflation even all prices and terms in contracts will be adjusted according to the price index. Historically, indexation has already been introduced in countries that have had to live with inflation rates of 30 or 40 per cent for years. Finally, there are many ways might tackle inflation for government. Income policies, institutional and constitutional reform with fiscal and monetary policies and indexing are the process to tackle inflation efficiently. Course: International Foundation Year Macroeconomics - Assessment Essay Semester 2 Student Name: Sze Wah, Leung Student ID: @00081259 ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related AS and A Level Macroeconomics essays

  1. Peer reviewed

    'The trade deficit on goods in the first three months of the year was ...

    4 star(s)

    If domestic producers have insufficient capacity to meet rising demand from consumers, then imports of goods and services will come into the country to satisfy this excess demand. As a result the current account will worsen. Poor price and poor non-price competitiveness could trigger this problem as well.

  2. Comparing the effects of immigration on GDP in Malaysia, Japan and South Africa.

    Therefore, this type of workers actually helps the country to fill the job vacancies in the lower level jobs. On the other hand, for skilled labours, they will mostly find jobs in blue collar and white-collar industries which require qualifications.

  1. How have the Rates of Inflation in the UK Changed Since the Monetary Policy ...

    This can be explained through an example; if employees expect there is going to be 10% inflation over the next year they are going to demand at least a 10% wage increase, employers give in to this and pass on the 10% in the form of a 10% price increase.

  2. Governments set economic objectives - Discuss the relative importance of each of these objectives ...

    be at the front of politicians' minds for the next three decades. Unemployment exploded under Thatcher in the 80s, but it was seen as an inevitable consequence of the steps taken to make industry more efficient. It was painful at the time but the lower levels of unemployment today are

  1. With the aid of diagrams, illustrate the causes if inflation and deflation, and by ...

    and Miller, R., 1998, p384). These costs are very minute so would not greatly effect the corporate sector as a whole. Businesses such as restuants, catalouge based comapies and those who produce vending machines would incounter minor expenses. This forseen inflation econany can be represented graphically as: But normally high inflation is not accurately predicted so other economic costs arise.

  2. Why does smoking lead to an external cost?

    Another benefit of protectionism is that it stops dumping. Dumping is the sale of goods at less than cost price by foreign producers in the domestic market. As a result large quantities of products are unnecessarily provided (dumped) upon countries. The fact that protectionism such as quotas is imposed stops this from happening.

  1. Compare and contrast the various methods of dealing with the problem of monopoly.

    They announced profits of �992 million for the first 6 months of this year, less than 24 hours after raising household prices by 35. This raises the question of whether or not these price rises are justified. They, along with the rest of the market, justify their actions on the

  2. Unemployment, inflation, economic growth and balance of payments have close relationships with aggregate demand

    of payments is moving into deficit The second phrase is a slowdown or recession which occurs when real GDP continues to expand but at a reduced pace and aggregate demand decreases. Consequently, unemployment begins to rise and economic growth start to have an up-ward trend however the effects on the

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work